Evening Update

Stocks See Red as 2010 Lies Ahead

As the bulls sat on the laurels of the steep gains in 2009, stocks came under pressure in the final trading session of the year, although losses may have been magnified by the light volume on Wall Street. The economic front was in focus, with a downward revision to Wednesday's Chicago PMI, which also adjusted the employment component of the report out of expansionary territory, overshadowing an unexpected drop in weekly initial jobless claims. Treasuries came under pressure after falling on the jobs report in an abbreviated session. Please note that all US markets will be closed on Friday in observance of the New Year holiday. In equity news, companies that have received government assistance were back in the news again on Thursday as GMAC confirmed Wednesday's report that it is receiving a third bailout, this time of $3.8 billion, while an AIG executive resigned over the salary restrictions imposed by the Obama administration's pay czar. Elsewhere, with a deadline rapidly approaching, Time Warner Cable and News Corp. have yet to reach a settlement in their subscriber fee dispute, and News Corp has indicated that it will not accept arbitration.

On Thursday, the Dow Jones Industrial Average fell 120 points (1.1%) to close at 10,428, the S&P 500 Index dropped 11 points (1.0%) to 1,115, while the Nasdaq Composite lost 22 points (1.0%) to 2,269. In light volume, 680 million shares were traded on the NYSE and 1.2 billion shares were traded on the Nasdaq. Crude oil was $0.28 higher at $79.56 per barrel, wholesale gasoline was unchanged at $2.06 per gallon, and the Bloomberg gold spot price increased $2.33 to $1,095.22 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 0.1% at 77.96. For the week, including dividends, the DJIA declined 0.9%, the S&P 500 Index fell 1.0%, and the Nasdaq Composite decreased 0.7%. For 2009, the DJIA rose 22.7%, the S&P 500 Index gained 26.5%, and the Nasdaq Composite advanced 45.4%.

The dispute between Time Warner Cable (TWC $41) and News Corp. (NWS $16) is approaching a deadline of midnight on Friday morning that could see NWS’s Fox-branded television channels removed from TWC’s cable systems. TWC late Wednesday offered arbitration that would help keep Fox channels on while discussions continue, but NWS responded in a note to its employees that extending the current terms past Thursday would "simply extend the period of time that Time Warner profits from our marquee programming without fairly compensating Fox for it." The dispute centers around News Corp. wanting $1 per subscriber per month in return for granting Time Warner Cable permission to carry those channels.

However, in late-day action, a spokesman from TWC said the company and NWS's Fox have received a letter from NY Congressman Steve Israel requesting a 30-day cooling-off period in the current negotiations, during which Fox programming would remain available to TWC subscribers. TWC said it accepts the Congressman’s proposal and urges Fox to do the same, reiterating that "Our customers should not be held hostage over a business negotiation." NWS did not comment during market hours on the letter. Shares of both TWC and NWS were lower.

GMAC confirmed Wednesday's widely reported story that the government will give it a third bailout, this time of $3.8 billion, which will increase the Treasury's stake in the struggling lender to 56% from 35%. The Detroit-based firm has already been issued $12.5 billion in previous injections. A government stress test earlier this year indicated that the firm needed to raise an additional $11.5 billion in funds to shore up its balance sheet, which GMAC has not been able to obtain through private capital.

Elsewhere, an American International Group (AIG $30) executive resigned due to the pay restrictions imposed by the Obama administration’s pay czar Kenneth Feinberg. Anastasia Kelly, AIG's vice chairman for legal, human resources, corporate affairs and corporate communications, stands to be paid approximately $2.8 million in severance, according to Reuters. She was among five executives previously reported by The Wall Street Journal to have notified the insurer that they were prepared to resign if their pay was cut severely by the government. Earlier this month, Feinberg set compensation limits for the 26th through 100th highest-paid employees at four firms, including AIG, limiting most cash salaries to $500,000. AIG is approximately 80% owned by the US government after receiving roughly $180 billion in taxpayer bailouts. Shares were slightly lower.

Jobless claims and Midwest business activity revision in focus as 2009 ends

Weekly initial jobless claims fell by 22,000 to 432,000, versus last week's figure which was revised slightly higher to 454,000. The Bloomberg consensus called for claims to increase modestly to 460,000 following last week's larger-than-expected drop. The four-week moving average, considered a smoother look at the trend in claims, fell to 460,250 from 465,750, and continuing claims dropped by 57,000 to 4,981,000, compared to the 5,100,000 forecast.

Meanwhile, December's Chicago PMI , which was originally reported on Wednesday, was downwardly revised from the initial reading of 60.0 to 58.7, which was still above expectations that called for the gauge of business activity in the Midwest to dip from 56.1 in November to 55.1. The Institute for Supply Management-Chicago said the revisions reflect annual updates to the factors used to adjust for seasonal variations. The revision also showed that the employment index was adjusted downward, from the expansionary result of 51.2-a reading of 50 is the separation point between expansion and contraction-to 47.6 for December. Treasuries, which came under solid pressure following the jobless claims report, pared some losses but remained lower. The yield on the 2-year note rose 6 bps to 1.14%, the yield on the 10-year note advanced by 5 bps to 3.84%, while the yield on the 30-year bond increased 3 bps to 4.64%. Please note, all US markets will be closed on Friday in observance of the New Year holiday.

International economic data quiet as year comes to a close

Many European exchanges were closed on Thursday in advance of the New Year holiday, leaving trading in the region unusually quiet. UK report showed home prices in the country increased for an eighth-straight month in December. In total, UK house prices rose by 5.9% in 2009. In other international economic news, China's central bank posted a New Year message on its website in which it pledged to maintain a "moderately loose" monetary policy because 2010 will be a crucial year for strengthening the recovery in the economy and "defeating" the financial crisis. The statement echoed repeated claims by the People's Bank of China this year that it will not remove its economic stimulus measures prematurely.

Street's conviction shifts into neutral for the final week of the year

With most on Wall Street already locking in the steep gains of 2009, the equity markets had little catalysts to drive any meaningful direction in the final week of a year which saw the Dow rise about 20%, the S&P 500 Index gain about 24%, while the Nasdaq jumped over 40%. However, as conviction was absent, there were some economic reports that may have caught the attention of traders that were unlucky enough to have to man their desks to ride out the year. The S&P/Case-Shiller Home Price Index posted the smallest decline since October 2007, while easing employment pessimism and expectations for the next six months reaching a level not seen since the recession began two years ago helped the Conference Board's Consumer Confidence Index post a three-month high. Moreover, even though the Chicago PMI was revised lower, the index remained at the highest level since May 2007.

Labor report headlines economic data in first week of 2010

The ISM Manufacturing Index will be released on Monday, forecasted to improve to 54.0 in December after dropping to 53.6 in November, which would indicate the fifth month of expansion in the manufacturing sector. Last month both ISM reports disappointed to the downside and the ISM Non-Manufacturing Index dipped below the 50 level that marks the separation point between expansion versus contraction in economic activity. The ISM Non-Manufacturing Index will be released on Wednesday, and is expected to have increased back into expansion territory, to 50.5 in December from 48.7 in November. The trends in the employment components of both indexes will also be watched for signs of improvement.

Wednesday will be chock full of data for traders to chew on, as they will also be watching the ADP Employment Change Report in another read on the employment situation. The forecast is that private sector employers shed 75,000 jobs in December after declining by 169,000 in November. The ADP report has been overstating job losses relative to the government's nonfarm payrolls report in recent months.

The Federal Reserve will also be in the headlines Wednesday, with the mid-day release of the minutes from the December Federal Open Market Committee (FOMC). There were no surprises from the statement read immediately following the meeting, but investors will be looking for signs of the timing that the Fed may be contemplating for exit of monetary stimulus.

Nonfarm payrolls will headline the week on Friday, with the Bloomberg survey of economists forecasting the decline in payrolls improved to a decrease of 1,000 in December, after falling a mere 11,000 in November, which was much better than economists had forecasted at the time. The unemployment rate is estimated to increase to 10.1% after falling from 10.2% to 10.0% in November.

Other releases on next week's busy US economic calendar include construction spending, pending home sales, factory orders, MBA Mortgage Applications, initial jobless claims, wholesale inventories and consumer credit.

The international economic calendar will also be heavy, with reports including UK Manufacturing PMI and the Bank of England's interest rate decision, German unemployment and factory orders, and eurozone industrial orders, retail sales, and consumer confidence. In Asia, China's Manufacturing PMI, Japan's vehicle sales, Australian retail sales, and Hong Kong's PMI will be released.